Macroeconomics: Consumption-Saving, AD-AS, and Fiscal Policy Vocabulary

A comprehensive set of vocabulary flashcards covering key macroeconomic terms related to consumption-saving behavior, the AD-AS framework, multiplier effects, and fiscal policy.

Personal Saving

The portion of disposable (after-tax) income that is not spent on consumption.

Disposable Income (DI)

After-tax income available to households for spending or saving.

Saving (S)

Disposable income minus consumption; S = DI − C.

Consumption

Household spending on goods and services; normally rises with disposable income.

45-Degree Line

Graph line where the value on the vertical axis equals the value on the horizontal axis, so C = DI at every point.

Consumption Schedule

A curve or table showing amounts households plan to spend at various levels of disposable income.

Saving Schedule

A curve or table showing planned saving at various levels of disposable income.

Average Propensity to Consume (APC)

Fraction of total income that is consumed; APC = C ⁄ DI.

Average Propensity to Save (APS)

Fraction of total income that is saved; APS = S ⁄ DI.

Marginal Propensity to Consume (MPC)

Fraction of any change in income that is consumed; MPC = ΔC ⁄ ΔDI.

Marginal Propensity to Save (MPS)

Fraction of any change in income that is saved; MPS = ΔS ⁄ ΔDI.

Paradox of Thrift

Idea that increased saving during a recession can reduce consumption and deepen the downturn.

Wealth

Total value of household assets minus liabilities.

Wealth Effect

Tendency for rising asset values to boost consumption and falling values to curb it.

Real GDP

Inflation-adjusted value of all goods and services produced within a country in a given period.

Real Interest Rate

Nominal interest rate adjusted for inflation; the relevant rate for investment decisions.

Investment Spending

Expenditures on capital goods; driven by expected profits and interest rates.

Expected Rate of Return

Marginal benefit from an investment, expressed as a percentage of cost.

Interest-Demand Curve

Graph showing the inverse relationship between the real interest rate and the quantity of investment.

Multiplier Effect

Process by which an initial change in spending leads to a larger change in GDP.

Spending Multiplier

Numerical factor showing total ΔGDP relative to initial ΔSpending; 1 ⁄ MPS or 1 ⁄ (1 − MPC).

Aggregate Demand (AD)

Curve showing total quantity of goods and services demanded at various price levels.

Aggregate Supply (AS)

Curve showing total quantity of goods and services produced at various price levels.

Real-Balances Effect

Lower price level increases the real value of money holdings, boosting spending and real output demanded.

Interest-Rate Effect (Price-Level)

Higher price level raises money demand, lifts interest rates, and reduces spending.

Foreign Purchases Effect

Higher domestic price level makes exports less attractive and imports more attractive, lowering net exports and AD.

Determinants of Aggregate Demand

Factors (C, I, G, NX, consumer wealth, exchange rates, etc.) that shift the AD curve.

Immediate-Short-Run Aggregate Supply Curve

Horizontal AS curve where both input and output prices are fixed.

Short-Run Aggregate Supply Curve

Up-sloping AS curve where input prices are fixed but output prices can vary.

Long-Run Aggregate Supply Curve

Vertical AS curve where both input and output prices are flexible; output at full employment.

Input Prices

Costs of resources (wages, materials) used in production.

Output Prices

Prices at which goods and services are sold; comprise the price level.

Productivity

Real output per unit of input; Productivity = Total Output ⁄ Total Inputs.

Equilibrium Price Level

Price at which aggregate demand equals aggregate supply.

Equilibrium Real Output

Real GDP where planned spending equals production; intersection of AD and AS.

Fiscal Policy

Changes in government spending and taxation aimed at influencing the economy.

Discretionary Fiscal Policy

Deliberate fiscal actions by policymakers to stabilize the economy.

Council of Economic Advisers (CEA)

Three-member group that advises the U.S. president on economic matters.

Expansionary Fiscal Policy

Increase in government spending, decrease in taxes, or both, designed to raise AD and output.

Contractionary Fiscal Policy

Decrease in government spending, increase in taxes, or both, aimed at reducing AD and controlling inflation.

Budget Deficit

Amount by which government expenditures exceed revenues in a year.

Budget Surplus

Amount by which government revenues exceed expenditures in a year.

Built-In Stabilizer

Automatic feature (like the tax system) that increases deficits during recessions and surpluses during expansions without new legislation.

Progressive Tax

Tax whose average rate rises as income rises.

Proportional Tax

Tax with a constant average rate regardless of income level.

Regressive Tax

Tax whose average rate falls as income rises.

Cyclically Adjusted Budget

Estimated budget outcome if the economy operated at full-employment GDP.

Cyclical Deficit

Portion of the federal deficit caused by a recession-induced drop in revenues.

Political Business Cycles

Instability resulting from policymakers manipulating fiscal policy to win elections.

Crowding-Out Effect

Government borrowing raises interest rates and reduces private investment.

Public Debt

Total amount owed by the federal government to holders of government securities.

U.S. Government Securities

Treasury bills, notes, and bonds issued to finance federal deficits.

External Public Debt

Portion of public debt owed to foreign individuals, firms, or governments.

Public Investments

Government spending on public capital (infrastructure) and human capital (education, health).

Aggregate Demand–Aggregate Supply Model (AD-AS Model)

Macro model using AD and AS curves to explain price level and real GDP.

Exchange Rate

Price of one nation’s currency in terms of another; affects net exports and AD.

Appreciation of the Dollar

Rise in the dollar’s value relative to foreign currencies; tends to lower net exports and AD.

Depreciation of the Dollar

Fall in the dollar’s value relative to foreign currencies; tends to raise net exports and AD.

Capital Expenditure

Business spending on durable capital goods; the most volatile component of total spending.

Durable Capital Goods

Long-lived investment items whose purchases can be postponed, making investment spending volatile.

Net Exports (NX)

Exports minus imports; component of aggregate demand.